The world’s largest bank by assets, Beijing-based ICBC, has announced it won’t take full responsibility for a trust investment worth 3-billion yuan (£300 million) that may go bust. In other words, one of China’s ‘big four’ banks may be linked to a default on a loan pretty similar to the sort that started the Lehman crisis in 2007.
In fact, it may be worse, due to the lack of transparency. The troubled Chinese loan was sold through a trust company that belongs to the nation’s vast and opaque shadow-banking system, which offers credit to companies that might find it hard to raise money otherwise. Many of these trust loans are of the convoluted, ‘structured’ kind that sparked Lehman’s downfall and rocked the world. China’s total shadow-banking debt now equals $4.8 trillion — when you consider that Beijing now holds a record $1.3 trillion in US Treasurys, you can see the global wave of financial unravelling that may arise.
Even if the state and municipal governments, along with ICBC, agree to cobble together a last-minute bailout, it’s only a matter of time before we see the first trust loan defaults emerging, shaking faith in China’s increasingly creaky banking system. Earlier this year, George Soros pointed out ‘eerie resemblances’ between the Chinese and American cases (though he did mention differences too).
Politically, this will shake the unspoken pact that China’s tiny elite of Communist Party officials has made with its 1.4 billion citizens for the past two decades— that while there may be lack of political freedoms, the economy will continue to grow faster, higher, stronger. This is why Beijing is now so keen to promote a sense of Chinese civilisational myth, of China’s cultural prominence, of its ‘Confucian’ values. It needs something intangible to hold the nation together if the material world fails.